2012 Most read post – The JP Morgan series

Good morning last day of 2012 checking the mood of market well. This is the most news driven market we’ve had since the Greece story. You gotta be quick on your feet.

Thought of sharing the post that attained maximum readers on a day. It was May 11 2012 when the leading financial media broke the story on Thursday night about the $2bn trading loss on credit derivatives trading, which chief executive Jamie Dimon blamed on errors,sloppiness and bad judgement” and warned “could get worse”.

Well the Centre of loss in non other than bank’s chief investment office (CIO).It is responsible for managing and offsetting the vast amounts of “credit exposure” the bank incurs through its dailybusiness of lending and investing on behalf of clients.It is legally allowed under the Volcker rule.

In the month of April 2012 Bloomberg and Wall street journal made the headlines JPMorgan Trader’s Positions Said to Distort Credit Indexes and ‘London Whale’ Rattles Debt Market.

The stories where pointing towards Bruno Iksil, the trader works for the bank’s “Chief Investment Office”.

The mystery trader, perhaps Mr Iksil, has gone long in a big way on the MarkitCDX.NA.IG.9, i.e. sold large amounts of protection against the 121 credits contained therein. Hedge funds are aware of the big position.

The CDX.NA.IG indices are comprised of 125 North American corporate credits that are investment grade when the index begins trading. Taking a position in the index allows traders to hedge or speculate. Going long means selling protection on the index in the expectation that the underlying company credits improve or at least do not default. Going short means buying protection on the index. The net notional value of the CDX.NA.IG.9 has surged from about $90bn at the start of the year to $150bn in April – indicating a big jump in trading. (Markit)…..

Picking up from the CDX.NA.IG indices are composed of 125 North American corporate credits that are investment grade when the index begins trading understanding JP Morgan loss. As derivative’s are zero sum game so if JP Morgan lost $2 billion from April 2012, than who made a $2 billion profit in the same time, well I don’t know.May be some unidentified hedge funds apparently. It was like once the sharks smelled blood in the water, they started betting against the whale, making his losses much bigger. The huge size that traders were complaining about when it was pushing the market around became a liability.

As it’s clear the activities performed at CIO office at the trading desk is not available to outside world untill the loss reveled out. Went through many financial reads and found WSJ quoted :

In recent weeks, hedge funds and other investors have been puzzled by unusual movements in some credit markets, and have been buzzing about the identity of a deep-pocketed trader dubbed “the London whale.” That trader, according to people familiar with the matter, is a low-profile, French-born J.P. Morgan Chase & Co. employee named Bruno Michel Iksil. Mr. Iksil has taken large positions for the bank in insurance-like products called credit-default swaps. Lately, partly in reaction to market movements possibly resulting from Mr. Iksil’s trades, some hedge funds and others have made heavy opposing bets, according to people close to the matter… However, Mr. Iksil has turned more upbeat recently. He has been selling protection on an index of 125 companies in the form of credit-default swaps. That essentially means he is betting on the improving credit of those companies, which he does through the index—CDX IG 9—tracking these companies.

The above explains that JPM’s CIO group has huge positions in CDX series 9. The sum total in this derivative alone was more than $150 billion.